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Ordinance would exempt freight hauling from sales tax

If the Kenai Peninsula Borough Assembly approves an ordinance amending the sales tax code, freight haulers will again be exempt from paying.

Freight haulers like Lyndon Transport were exempt from paying sales taxes in the Kenai Peninsula Borough up until last year, when the borough assembly passed a an ordinance containing a raft of changes to the borough sales tax code. The ordinance, proposed by Borough Mayor Mike Navarre’s administration as part of a complete review of the borough’s property and sales tax codes, reasoned at the time that buses and taxis pay taxes and “there is no public policy justification to treat the moving of goods differently than moving people,” according to a memo with the ordinance.

However, it turns out there may have been a good reason. Federal law prohibits the taxation of freight moving between states and the borough sales tax only applies to the final consumer, so intermediate movers are exempt anyway. At this point, the only freight haulers being taxed are those strictly moving goods within the state, which are few and the revenue is less than the effort and time required to enforce it, said Larry Persily, special assistant to Navarre.

“Most of the freight is what we call an intermediate service,” he said. “Borough sales tax is structured that we only pay the sales tax once … We’re having problems with the interstate commerce issues.”

The borough finance department has had to go to a lot of effort clarifying who is exempt from taxes and who is not, classifying the entire path of goods from beginning to end, and exempting freight carriers would save staff time and effort, Persily said.

The administration projected that taxing freight would increase sales tax revenue because many freight shipments start on the Kenai and end elsewhere, but after the change went into effect, they found many of the transactions are “intermediate” service on their way to somewhere else and sales tax would be assessed at the final retail transaction, according to the ordinance, introduced at the borough assembly’s Tuesday meeting.

The ordinance recommends reinstating the exemption and defining “freight hauling service” and “delivery service charge” in code. That’s to make sure delivery and courier services are still subject to tax, Persily said.

The assembly discussed the change briefly at the finance committee meeting Tuesday, with few comments from the assembly members, and none in the general meeting. It is scheduled for a public hearing at the Oct. 10 meeting.

The borough relies on a mix of sales and property tax revenues for the majority of its budget, with an estimated $28.5 million in property taxes and $29.9 million in sales taxes projected for fiscal year 2018, according to the borough’s finalized budget. However, in the past several years, sales tax revenue has come in below projections, in part due to lower gas prices and in part due to the reinstatement of the year-round sales tax exemption for nonprepared foods, also known as the grocery tax, several years ago.

As a way to help shore up sales tax revenue, the assembly approved a ballot measure asking voters if the borough should increase the cap on taxable sales from $500 to $1,000 in a single transaction, with an exception for residential rents, which will retain the $500 cap. The change is estimated to generate between $2.9 million and 43.1 million annually for the borough, with varying amounts for the cities that assess their own sales taxes, according to the fiscal note with the ordinance introducing the sales tax cap ballot measure.